TAXATION LAW IN KUWAIT
There is no personal income tax system prevail in Kuwait either on salaries or on income from business activities. More over there are no other taxes of any consequence, such as sales or value added taxes, property taxes etc. which means the individuals (Kuwaiti or expatriates) and Kuwaiti companies are not subject to income tax. The Kuwaiti companies with non-Kuwaiti partners or shareholders are not coming within the purview of Income tax law, unless those shareholders or partners are foreign companies, in which case the tax is imposed on the foreign company's share of earnings only. A foreign company engaged in commercial activities in Kuwait, directly or indirectly is liable to pay income tax. Corporate income tax is not levied on the income of companies incorporated in the Gulf Co-operation Council (GCC) countries, wholly-owned by GCC nationals from their operations in Kuwait. However, GCC companies with foreign ownership would be subject to taxation to the extent of the Foreign ownership.
The taxation on income in Kuwait governs by the following two enactments, Kuwait Income Tax Rules (Decree no. 3 of 1955) and Law no. 23 of 1961, which regulates the income of companies in the designated area.
The Kuwait National Assembly passed a law on 26 December 2007, that amends several provisions of Income Tax Decree No. 3 of 1955 .Which is a major amendment to Kuwait's tax regulations affecting foreign companies, doing business in Kuwait, became law upon the publication in the official Gazette on February 3, 2008.
The most important change is a substantial reduction in the income tax rate on net profits of foreign entities doing business in Kuwait. The new tax law stipulate a flat rate of 15% instead of the current rate, a range of 5% to 55%, depends on the earnings above KD.5,250/-. The 15% tax will be levied on the income of any entity carrying on a trade or business in Kuwait, regardless of where the company is incorporated. The new flat tax rate will result in a significant decrease in the tax liability of such foreign entities.
Besides changing the tax rate structure, the new enactment adds more specific provisions as to what are the taxable heads of income. Earnings from any of the following activities are subject to the tax:
• Profits derived from a contract executed partially or fully in Kuwait;
• Income derived from the sale, lease or granting franchise to use or exploit any trademark, patent or copyright;
• Commissions due or received from representations or trade brokerage;
• Profits derived from industrial and commercial activities;
• Gains derived from the disposal of assets;
• Profits derived from the purchase and sale of goods or property or rights thereto and from the opening of a permanent office in Kuwait where contracts of sale and purchase are executed;
• Profits from the leasing of property; and
• Profits derived from the provision of services.
Further, the amendment clarifies that income derived by foreign entities from the sale of shares on the Kuwait Stock Exchange will be exempted from income tax in Kuwait, irrespective of whether it is directly made or via investment portfolios or funds.
The new legislation includes clear guidance for foreign entities to assessing the sources of taxable income. The amendment further clarifies that taxable income is determined after deducting all expenses and costs incurred, including the following;
• Salaries, wages, bonuses and end-of-service indemnity, etc.;
• Taxes and fees, except for income tax due under the law;
Depreciation of assets in accordance with the rates specified in the executive regulation;
• Grants, donations and subsidies paid to public or licensed private Kuwaiti entities according to the rates specified in the executive regulation; and
• Head office expenses as specified in the executive regulation.
The following are non-deductible expenses:
• Personal and private expenses and any charges not related to the taxable activities or not for the purpose of generating profits;
• Penal fines; and
• Reimbursed losses.
The law also imposes a limit on a company's ability to carry forward the losses, which are hereby limited to three years, provided the compulsory suspension periods from practicing business will be exempted. Under the previous tax law, companies were able to carry forward the losses for an unlimited period of time.
The enactment creates the provision for the limitation of this tax after the elapse of five years from the date of submission of tax returns by the entity or from the date when the tax authorities become aware of the facts, not disclosed or hidden by the entity to evade their tax obligation. Further, the period of limitation will expire upon advising the incorporated entity of payment of tax or of the resolution of Tax Objections Committee by registered mail indication the tax amount. The Georgian calendar year is used for taxation purposes. An eighteen month accounting period is allowed initially, thereafter twelve-month accounting periods are required. The deadline for filing tax declarations is the fifteenth day of the fourth month following the end of the taxable period. Tax is payable in four equal installments on the fifteenth day of the fourth, sixth, ninth and twelfth months following the end of the taxable period. When filing audited accounts an extension of a maximum of 75 days may be granted. No tax payment can be made until the accounts are filed. This applies particularly when and extension has been granted. However, if the payment has been left to the last moment it must be in lump sum, no installments will be allowed. The method of payment will be cash or a certified cheque drawn on a Kuwaiti bank.
Article 9 of the Tax Decree provides that the income tax statement shall be certified by the firms of auditors which are approved by the Director of Taxes in this regard. The income tax declaration and supporting financial statements must be in Arabic and are to be certified by an accountant, registered with the Ministry of Commerce and Industry.
The tax authorities shall have powers to require any foreign entity to review the entries in the tax returns and to compel to provide supporting documents. The authorities have discretion to approve, adjust or disregard the expenses.The law further clarifies that the profits of Kuwaiti commercial agents are not subject to taxation under the law and that only commissions paid to foreign companies as a result of an agency agreement are subject to tax. A Kuwaiti commercial agent's earnings are not taxed as long as the profits arise from the sale of goods for the agent's own account.
The law provides a period of six months from the date of publication for the Ministry of Finance to issue the executive regulations for implementation.
Review and comments by The Law Firm of Labeed Abdal, Kuwait.
For further queries and clarifications, please feel free to contact:
The Law Firm of Labeed Abdal,